Chris Williams looks at how you can maximise the income benefits of owning your company’s trading premises without losing out on entrepreneurs’ relief.
If you own a company and want to buy property for it to operate from, the obvious first choice may be for the company to buy it, so keeping everything nice and neat; but is that always the best idea? You may expect the business to grow to the point where you want to bring in partners or other shareholders but would prefer to retain the property personally, perhaps so that you can retain it as a source of income when you retire and sell the business, or because it may have long-term development potential. If that’s the case, how do you go about it and how do you make the most tax-efficient use of the property?
Ownership issues
The first issue is how you finance it. You can rent it to the company and charge up to the market rent for it, but do you want to charge that rent? You may need income to fund your borrowing but only the interest is allowable as a tax deduction against rent, so if you have to repay the loan capital you’re going to have to be sure that the rent you receive will cover the interest, the capital you repay and the tax you’ll pay on any rental profit. If you can do that, you’re set fair. In fact, there’s every reason to take the maximum rent you can justify. The rent the company pays you is a business expense, so the company gets corporation tax relief, and the rent you receive isn’t subject to National Insurance contributions either.
If the property is likely to need repairs or major alteration, consider putting a formal lease in place at a fair rent for the property in its present state. The company can then incur the costs of the improvements and claim capital allowances on any equipment installed, but when the lease ends the property will revert to you, possibly with its value enhanced.
Selling the property
If the time comes when the company needs to move to bigger or more suitable premises, you’ll be in a position to decide whether to keep the premises and find another use for them, or find another tenant, or sell them. In either case, you may be going to buy new premises for the company. If you sell the old premises and buy a replacement, provided the old premises were always used fully by the company in its trade you can ‘roll over’ any gain on the old premises into the replacement, and you won’t immediately pay any CGT if you reinvest all of the sale proceeds of the old premises in the new ones.
When the time comes to withdraw from the business you can sell the company, and if it’s a trading company that you’ve owned outright you’ll generally get entrepreneurs’ relief on the shares. What about the property? If you’ve always charged full rent for it you won’t be able to get any entrepreneurs’ relief if you sell it with the company, but that’s not the end of your options.
Practical Tip:
If you own your company’s premises personally and charge rent you can transfer the property to the company before sale to maximise entrepreneurs’ relief. The property doesn’t have to be in the company for any minimum period of time and you don’t have to sell it. You can gift the property to the company and hold over the gain. The company will pay any stamp duty land tax, not you, and you can claim full entrepreneurs’ relief on the value of the company. That value will include (and be increased by) the value of the property, and the whole gain will be eligible for entrepreneurs’ relief.
